NCPA - National Center for Policy Analysis

Subsidizing Wealthy Home Buyers

March 30, 1998

President Clinton wants to raise the limit on Federal Housing Administration loans to home-buyers from $86,000 to $227,000. To afford a home at that price, a buyer would typically be required to have an income of $80,000 a year -- double the median family income. Opponents say such a move would subsidize the rich.

Moreover, by the gimmick of counting the premiums raised from FHA mortgage insurance subsidies as new tax revenues, Clinton could claim to have lowered the budget deficit by $200 million -- giving his administration more to spend, they predict.

When the housing market suffers another downturn, they warn, taxpayers could be stuck for tens of billions of dollars in defaults.

The FHA is already vulnerable:

  • Loan guarantees in its portfolio now stand at $360 billion -- a liability that would rise dramatically if loan limits are lifted.
  • When the FHA lost a record $1.4 billion in 1988, its loan portfolio was only one-third what it is now.
  • In recent years, the delinquency rate on FHA loans has soared to 8 percent -- triple the delinquency rate on conventional loans.
  • FHA mortgage defaults and property acquisitions have jumped to $4.25 billion over the past year -- even in the midst of an incredibly strong housing market.

The FHA was created to serve lower-end home-buyers who might not be able to get mortgage insurance in the private market. Private insurers now serve more than half the lower-end market, but FHA officials admit they want to raise the levels to maintain their market share.

Why, critics ask, is all this government involvement, self-perpetuation and competition with private enterprise necessary when the housing market it already being served by private firms?

Free-enterprise economists say the FHA is obsolete and Congress should shut it down.

Source: Stephen Moore (Cato Institute), Washington Times, March 30, 1998.


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